We do not know the size of the Fed's program, nor do we know how the markets
will react in the short-term. However, one thing we know with near certainty
- a large quantity of newly printed money is going to flow from the Fed to
the eighteen primary dealers. We also know a significant amount of the electronic
greenbacks will flow from the primary dealers into the accounts of their clients.

Since the Fed encourages the primary dealers to offer client bonds in the
QE competitive bidding process, it is helpful for investors to know more about
the clients of the primary bond dealers. Sovereign wealth funds, who do business
with numerous primary dealers, will be one of the most influential groups who
may participate in QE2. A sovereign wealth fund is a state-owned investment
fund, which holds a wide variety of financial assets, including stocks, bonds,
commodities, currencies, precious metals, and real estate.

One of the largest sovereign wealth funds is the Norway Global Government
Pension Fund, which holds somewhere in the neighborhood of $400 billion in
assets. Others include the China Investment Corporation ($300 billion), Singapore
Investment Corporation ($250 billion), Hong Kong Monetary Authority ($225 billion),
the Russia National Welfare Fund ($140 billion), and the Australian Future
Fund ($60 billion).

To give a hypothetical example of how the Fed's newly printed money can make
its way around the globe, assume the following: (a) concerned about the currency
risk associated with holding too many U.S. Treasuries, the Singapore Investment
Corporation (SIC) decides to sell some bonds to the Fed via the QE2 program,
(b) the Fed takes the Treasuries and the SIC gets newly printed U.S. dollars
in return, (c) since holding U.S. dollars also entails currency risk, the SIC
decides to diversify into gold, global stocks, and emerging market bonds. This
hypothetical example shows how the Fed's printing press can, in theory, create
demand for other assets and thus, help drive asset prices higher. Higher asset
prices can help improve strained balanced sheets which can, in theory, spark
more spending, investing, borrowing, and hiring (emphasis on in theory).

Understanding the global footprints of the primary dealers and their clients
allows us to visualize the broad geographic reach of the Fed's printing press.
Understanding the buying power and investment influence of large clients of
the primary dealers, like sovereign funds, helps us understand how QE2 may
potentially impact a wide range of markets from currencies to commodities.

The flow chart below shows how the Fed's newly printed cash can flow from
the Fed to the primary dealer, then to the primary dealer's clients.

With the million dollar question relative to QE2 being the magnitude of the
Fed's planned bond purchases, we can expect some volatile trading sessions
for the next week or so. According to a Forbes/CNN
article:

Economists at Goldman Sachs estimate the Federal Reserve may need to buy
a staggering $4 trillion worth of assets such as Treasury securities to get
the economy rolling again. The Goldman economists, Jan Hatzius and Sven Jari
Stehn, don't expect the Federal Reserve to go nearly that far when it resumes
its asset-purchasing quantitative easing policy. Citing many officials' unease
with the prospect of adding significantly to the Fed's already bloated balance
sheet, Goldman expects the Fed to end up buying around $2 trillion worth
of assets over the next few years.

Traders, money managers, and active investors may want to get some extra rest
this weekend; with mid-terms and a Fed announcement coming early next week,
both stress levels and market volatility will most likely be elevated.

Chris Ciovacco is the Chief Investment Officer for Ciovacco
Capital Management, LLC. More on the web at www.ciovaccocapital.com.

All material presented herein is believed to be reliable
but we cannot attest to its accuracy. Investment recommendations may change
and readers are urged to check with their investment counselors and tax advisors
before making any investment decisions. Opinions expressed in these reports
may change without prior notice. This memorandum is based on information available
to the public. No representation is made that it is accurate or complete. This
memorandum is not an offer to buy or sell or a solicitation of an offer to
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in this report may be unsuitable for investors depending on their specific
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Ciovacco Capital Management, LLC is an independent money
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